Crypto Financial Derivatives Requirements increased by EU Market Watchdog

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EU Market Watchdog has increased Crypto Financial Derivatives Requirements

The European Securities and Markets Authority (ESMA) has reinforced requirements for Contracts for Differences (CFDs) in digital currencies, as said in a statement on 27th March.

CFDs are an arrangement in a future contract whereby variation in the settlement is made in cash payments, rather than by the delivery of physical goods or securities. It is viewed as a more straightforward technique for compensation, as all profits and losses are paid in cash. It further gives investors similar danger and benefits of security, without really owning one.

The EU regulator will change the leverage limit of digital currencies CFDs to 2:1 at the opening. It implies that investors must have enough funds to cover at least half of a contract value upon opening. At first, the leverage limit settled at a rate of 5:1, which enables investors to enter the arrangement with only 20% of the CFD’s value on hand.

In January 2018, ESMA issued a Call For Evidence in regards to potential intervention with cryptocurrency CFDs, asserting that a very high price difference of digital currencies as underlying assets gave rise to concerns for investor protection.

In the latest statement, ESMA highlighted that digital currencies still pose a danger to investment operations and require more careful monitoring.

ESMA stated:

“For CFDs on cryptocurrencies, many of these concerns remain present. Due to the specific characteristics of cryptocurrencies as an asset class the market for financial instruments providing exposure to cryptocurrencies, such as CFDs, will be closely monitored, and ESMA will assess whether stricter measures are required.”

The position of ESMA is shared by other regulatory agencies in EU member states. In February, the French financial markets regulator Autorité des marchés financiers (AMF) said in a statement that digital currency derivatives must be regulated under new EU financial reforms. While trading platforms offering digital currencies CFDs must be regulated and cleared under the European Market Infrastructure Regulation (EMIR).

In the same month, the Austrian Finance Minister proposed forcing regulation on digital currency derivatives to avoid money laundering using cryptocurrency.

EU regulator has continuously cautioned consumers about the “high risk” correlated with investing in digital currencies, stressing the absence of protection and understanding, money loss, and issues with unregulated financial activities.

Suzat Fernandes

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